The U.S. Dollar in Early 2010 Trading

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The U.S. trade-weighted dollar began a significant sell off in early March 2009 from the 89.00 level. By November 25th (the day before Thanksgiving), it hit its yearly low at 74.23. Almost as if on schedule, a rally began in December and lasted until the 22nd (right before Christmas). Trading was mostly flat in the first week of 2010, but off the December highs. Gold, which sold off as the dollar rose, rallied strongly in the first trading week of the year. The dollar is struggling and the technical picture now looks negative in the short-term. The December rally did nothing to reverse the intermediate or the long-term downward trend in the dollar. The currency hit its high in the mid-1980s.

The Euro and Swiss franc both peaked the day the dollar bottomed and bottomed the day the dollar peaked. The British pound, which should be a weak currency considering the extensive money printing taking place in the UK, peaked earlier on November 16th and bottomed later on December 29th. The Japanese yen, which rallied strongly starting in early April 2009, peaked on November 30th and bottomed so far on January 7th. The commodity-based currencies the Canadian and Australian dollar behaved somewhat differently. The Australian dollar peaked with the pound, but bottomed with the euro. The Canadian essentially traded flat.

The selling in the yen was sharp and powerful in the first few days of December and had the fingerprints of central bank intervention all over it. Export driven economies in Asia are becoming increasingly desperate to keep their currencies from rising against the dollar since this makes their goods more expensive and hurt their economies. On January 11th alone, at least four Asian central banks - India, South Korea, Singapore and Indonesia - bought U.S. dollars in the currency market. Unlike other currencies, the Chinese yuan doesn't float and this is negatively impacting its Asian neighbors and all other exporters. The Chinese are engaging in jawboning however to try to talk down the dollar. An investment strategist for the Chinese government sovereign wealth fund just commented that the U.S. dollar had bottomed, but the yen should be selling off. He further stated, "China now has a voice in influencing the dollar's exchange rate and the interest rate on U.S. government debt." For some reason, a laugh track didn't accompany the Internet postings of this news.

It is not surprising that the U.S. dollar rallied in December, even if the cause was central bank intervention. No asset, no matter how weak, can drop in price every day. There are always counter rallies, just as there are counter sell offs for assets that are going up most of the time. The underlying problem with the U.S. dollar is irresponsible monetary and fiscal policy. Until these are corrected, and it looks like they will only be getting worse for the next several years, a sustainable rally in the dollar against hard-assets is not possible. Central banks can intervene all they want, but the results will only be temporary. It should be kept in mind that exchange rates in and of themselves are not the only thing that is important. We are in an era when all fiat currencies globally are losing their value against gold. Unless something is done to stop this, paper money will eventually get to its intrinsic value, which is zero.
 
Disclosure: Long gold.

NEXT: A China in a Bull's Shop

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Dance of the Declining Dollar Continues

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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The trade-weighted dollar fell below 75.00 yesterday, only seven trading days after it decisively broke 76.00. It is up above 75.00 this morning and should have a short rally at some point soon because it is too far below its 50-day moving average. Any recovery will only be temporary however. Selling pressure seems to never be far away. The short-term rallies have the signature of some form of government intervention. They are sharp, sudden and tend to take place after some support level has been broken and when trading in the U.S begins. Once the intervention money runs out however the dollar just continues its downward drift.

Manipulating a major currency is an expensive undertaking and requires a lot of resources. The size of currency markets is huge compared to the bond market, which in turn is huge compared to the stock market. Direct intervention requires using foreign exchange reserves. The U.S. has almost none of these. Late July figures from the Treasury website indicate that the U.S. has only a net $7 billion in reserves (foreign currency holdings minus short positions). This would be appropriate for a small developing economy, not a superpower. In contrast, China has approximately $2000 billion in foreign reserves. All the big holders of foreign reserves hold large amounts of U.S. dollars. Their intervention in the currency markets would require they buy even more dollars with their other more desirable reserves in euros, yen, pounds or other currencies. This would not be a good deal for them.

Significant intervention to hold up the dollar will be occurring probably next year. There has been a history of such interventions in the post World War II era. Their effect is only short-lived unless the underlying condition that caused the currency weakness in the first place is corrected. In the current case, the U.S. needs to raise interest rates to attract dollar investments. The actual condition of the U.S economy (not the phony PR about the recovery) makes this impossible for the next many months. It is possible though that an extreme drop in the dollar may force the Fed's hand next spring.

Whether the dollar just continues its slow agonizing fall, which has become a fixture since the U.S. left the gold standard in 1971, or whether there are some serious short term declines (this happened through devaluations in the 1970s) remains to be seen. This fall may be the first time one of these sharp, sudden drops takes place.

NEXT: In for a Penny, In for a Pound

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

IMF Selling Gold to Dampen Rally

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Like clockwork, the IMF gold sale has reared its ugly head again as has occurred during a number of previous gold rallies since 2007. This time the IMF is actually selling the gold. It only threatened to do so the previous six times or so. It says it is looking for a central bank buyer. For some time, rumors have claimed that the central bank buyer will be China and these resurfaced again last week before the IMF announcement. China is playing coy however and says it wants the gold at a discount to the current $1000 price. Other possible buyers include Russia, the Gulf Oil States, Japan and India, all of whom have relatively low gold holdings and too many U.S. dollars.

The IMF is selling one-eight of its claimed gold holdings (the IMF is not audited, nor will it answer questions about whether its gold is held in individual contributing countries and being double counted as part of their gold reserves) or 403 metric tons. While this sounds like a lot, its is less than $13 billion at current prices. China alone has approximately 2000 billion dollars in reserves held in foreign currencies, almost half of which are in U.S. dollars. China's current gold holdings are 1054 metric tons, up from 400 metric tons in 2003. So it has less than $33 billion in gold versus almost 1000 billion in U.S. dollars. It is thought that the gold sale is being used as a way to let China get rid of some its U.S. dollars without dumping them on the open market.

There is also a two-day Fed meeting this week on Tuesday and Wednesday and a G20 meeting this Thursday. Since the Credit Crisis began two years ago, the U.S. dollar has rallied from just before the Fed meeting to just after (gold falls in response). This has happened no matter how much the Fed has announced it is debasing the currency. No one in their right mind would buy dollars under such circumstances, which leads to the obvious conclusion that global monetary authorities are acting in concert at these times to hold the dollar up. Expect this again this week. As mentioned in this blog on Friday, the dollar is too extended from its 50-day moving average and will try to rally back to that point.

Gold has traded as low as $996 this morning and the trade-weight dollar is at 76.97 at the moment (still below its 78.33 break down level). Expect general weakness in gold and the other precious metals and strength in the dollar until Thursday. A reversal for both after that is highly likely. Keep an eye out for buying opportunities, particularly in the mining stocks.

NEXT: Manipulation Fails, Gold Rallies Back

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Probable Future Outlook for the United States

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Guest Blogger: Trevor Gauntlett from 'Running the Gauntlett'

What concerns me most is looking at the highly probable future outlook for the U.S. …

The government is taking over Freddie and Fannie, which will help out new, but not existing home buyers. By assuming responsibility for their debt, the gov’t is using inflation adjusted tax dollars to keep these companies operating . However, a $500 billion dollar short fall is projected this year in the budget and the U.S. national debt is already at about 9.7 trillion and growing ever so rapidly. If we tack on unfunded liabilities, we are talking anywhere from 50-70 trillion in obligations. Effectively the government is insolvent. Now what happens when government revenues begin to decline due to the slowing economy, baby boomers start to take money out of social security and access Medicare when they retire, and the continuation of the Iraq war / Afghan war / maybe Iran war?

I’m failing to see the light at the end of the tunnel.

During the housing boom, U.S. consumers purchased houses because money was cheap. Everyone felt rich so they purchased more consumables for immediate gratification. These weren't investments with productive value that would add to the economy in the future and they experienced immediate depreciation. Once U.S. consumers could no longer get money out of their homes through refinancings and HELOCs (home equity lines of credit), we started using our credit cards. Look at who is producing and who is consuming… we in the USA are primarily guilty of the latter and it is all funded through the rest of the world’s savings. At some point other countries are going to refuse to continue supporting the U.S. spending binge - this might already be taking place.

As for housing it will have to come back down to reasonable values. If we encounter a period of hyperinflation then housing could be a good asset to hold onto (although this was not the case during the hyperinflation in Wiemar Germany in the early 1920s). On the other hand, if we have a depression I could argue the opposite.

People are already losing their HELOCs because banks are worried that consumers won’t be able to afford them. Legal or not this is happening. I also heard from a Real Estate agent in Seattle that banks are asking for 25% down on new mortgages. In an earnings call in late January 2008, Bank of America executives said credit card delinquencies in California, Florida, Arizona, and Nevada—states with high foreclosure rates—increased five times as fast as in other states, suggesting that consumers struggling with their mortgage debt are also finding their credit card bills hard to pay. “We’re focused on getting paid for the risk we take,” said Joe Price, chief financial officer. - US News and World report 2/28/2008.

What happens if the United States dollar loses its status as the reserve currency? Then everyone with dollars will flood the market to get rid of them. The dollar is a commodity just like gold and silver, but unlike gold and silver any amount of it can easily be created. It has no intrinsic value and is a exchangeable commodity and legal tender because of government fiat (hence paper money is fiat money or fiat currency). If people want dollars, the price rises and as people desire them less, the price falls. Loss of reserve currency status would mean the demand for U.S. dollars would fall significantly. Why would anyone want dollars when you look at the future for the US economy except because of necessity or political reasons?

The GSE bailout will help to prolong the issues that the financial industry is facing. The United States government will do everything in its power to support the system through money creation and taxation, giving individuals and institutions more time to pull their money out of the dollar. An immediate collapse would make that very difficult and costly.

I’m getting the sense that things could get a whole lot worse than any of us imagine.

NEXT: The Banks and Brokers Most Likely to Fail - The Big Players

Daryl Montgomery

Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Inflation Versus Deflation Argument - Part 4

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

While it is true that the U.S. experienced consumer price deflation in the 1930s and Japan did so in the 1990s and both experienced sharp drops in bank credit, there are few if any other similarities to the current situation in the United States in 2008. The situation in the 1930s U.S. and 1990s Japan is also a bit more nuanced that the deflationists would have you believe. In the late 1920s, the U.S. did see a big rise in money supply and credit, just as occurred in the U.S. in the early 2000s. According to the deflationists, this should have resulted in rising U.S. consumer prices at some point. It did not. Prices actually fell between 1926 and 1929. A similar thing happened in Japan in 1986. While consumer price deflation did appear in Japan after its banking system literally fell apart, it didn't show up consistently until 1999, nine years after the Japanese asset bubble began to burst. Based on these observations, the relationship between consumer prices and money supply and credit seem to be rather tenuous at best.

The deflations in the 1930s U.S. and 1990s Japan did have an important element in common that does not exist today - dropping commodity prices. As early as the spring of 1929, farm commodities in the U.S. experienced a sharp drop. All commodities declined in the crash month of October and then they crashed themselves in the spring of 1930 . While commodity prices didn't crash in the 1990s, they were weak throughout the decade. Oil reached its price low of just over $10 a barrel in 1998. Ten years later it would be almost 15 times higher. Not only were commodities not declining in the 2000s, but they were experiencing major price increases resulting in significant inflation in the U.S. and most of the world. The commodity picture in the 2000s was just the opposite of the early 1930s U.S. and 1990s Japan.

The import/export and deficit picture has no similarity to the contemporary U.S. either. In the late 1920s, the U.S. had a massive trade surplus and was the biggest creditor nation in the world. Its boom had been built on exports as was the case for Japan in the later twentieth century. Drops in exports damaged both economies. On the other hand, the U.S. in the 2000s was the biggest debtor nation in the world having both a massive trade deficit and government debt, which required heavy borrowing and had inflationary implications. Japan in the 1980s was similar to the U.S. in the 1920s and both were very dissimilar to the U.S. in the 2000s.

Currency also plays a different role in all three scenarios. The U.S. was on the gold standard until 1933 and even after that the currency didn't float. The Japanese yen traded relatively flat during the 1990s. In neither case, did currency have a significant deflationary or inflationary effect, in contrast to the U.S. in 2008 where currency played an inflationary role. The U.S. dollar dropped to all time lows in late 2007 because of the Federal Reserves easy money policy. Since the U.S. imported much more than it exported, this raised import prices and had a bigger inflationary impact than it would have had otherwise.

NEXT: The Inflation Versus the Deflation Argument - Part 5

For notes related to this talk, please see, 'Inflation vs Deflation Argument' at:
http://investing.meetup.com/21/Files

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

For more about us, please see our web site: http://investing.meetup.com/21

The Inflation Versus Deflation Argument - Part 3

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

For a theory to be valid, it must produce results consistent with reality. Neither the deflationist arguments in Wiemar Germany in the 1920s, nor those made in 2008 in the United States could meet this most basic of all criteria. The contemporary U.S. deflationists are claiming that an era of lower prices is upon us even though consumer prices are continuing to rise and the rise seems to be accelerating. Both groups of deflationists redefined inflation to be something else, or in other words, they changed reality to match their theory instead of the other way around. In neither case was any relationship demonstrated by them between their definition of inflation and changes in consumer prices.

The deflationists claim that inflation is an increase in money supply plus bank credit. While everyone could agree that bank credit in the United States was falling in 2008, the same could not be said for money supply. Their are many definitions of money supply and M3, a broad category that would include the Federal Reserves newly created money pumping operations such as the TAF, TSLF and PDCF was expanding rapidly. Since the deflationist argument would fall apart using their own criteria if M3 figures were used, they chose to look at much narrower definitions of money supply such as M2 to try to support their theory. Even then, M2 was experiencing robust growth of over 6% until the second quarter of 2008, when it slowed to around 1%. This was hardly the dire collapse that the deflationists claimed to be happening.

Logically, the deflationist definition is inherently defective because it considers inflation to be a local rather than a global phenomenon. In an era with worldwide commodity trading, prices are set globally for key components of consumer inflation such as energy and food products, not based on what's happening in a single country. Under such circumstances, currency fluctuations then determine the different rates of inflation between countries.

The deflationists argument is also too limited in that it considers money supply and credit, but not assets. In a rich developed country, people can spend their wealth (liquid and tangible assets) as well and they will if they need to do so to buy necessities. This is exactly what happened in Wiemar Germany, where the middle and even upper classes sold their family's prized possessions in order to eat.

The U.S. deflationists also try to bolster their case with comparisons to what is happening in the United States now and what happened in the deflationary periods of the 1930s U.S and the 1990s Japan. Only the most superficial comparison shows any similarities between the U.S. in 2008 and these earlier time periods. Under closer examination the deflationist comparisons completely fall apart.

NEXT: The Inflation Versus Deflation Argument - Part 4

For notes related to this talk, please see, 'Inflation vs Deflation Argument' at:
http://investing.meetup.com/21/Files

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

For more about us, please see our web site: http://investing.meetup.com/21

China's Olympic Sized Bubble

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

The credit bubble in the U.S. did not exist in isolation, but was inextricably linked to a bubble in China U.S. trade. One of the many manifestations of this bubble was a Chinese stock market that started going straight up in late 2006, reaching extreme valuation levels based on any historical standard. The New York Investing meetup discussed this issue in its October 2007 meeting in a presentation entitled, "Thinking Outside the Bucks" (please see: http://investing.meetup.com/21/files).

In the 1990s and early 2000s, China was the most significant economic success story in the world. Rapid industrialization and trade grew the Chinese economy and kept consumer prices down in the West. This was accomplished by utilizing China's large pool of inexpensive labor to produce an increasingly greater number of goods for export. Since labor is the largest cost component for almost all manufactured goods, this lowered prices globally for a number of items. However, China went one step further to insure it could continue to sell its exports at low prices - it pegged its currency to the U.S. dollar (an idea originally suggested by the American monetary authorities, much to the later regret of U.S. politicians). The dollar peg allowed China to keep its currency undervalued, just as Japan had done during its decades of spectacular growth, and provided its exports with a huge advantage in world markets. It also insured the creation of a massive bubble.

As Chinese exports to the U.S. increased, China accumulated a growing hoard of dollars that it used to purchase U.S. treasury bonds. This in turn kept interest rates low in the U.S. and allowed Americans to borrow ever greater sums to finance a purchasing-based consumer economy and for the U.S. government to borrow cheaply to finance a ballooning national debt.
Pegged currencies are not without their downsides, however, as China eventually found out when its internal rate of inflation began rising. In July of 2005, China officially, but not actually depegged the Yuan from the U.S. dollar. The Yuan was allowed to float in such a narrow trading band that by September 2007 it had fallen only to 7.50 from 8.28 to the dollar. Since the Yuan wasn't allowed to float to a realistic level, inflation started taking off in the mainland and the Chinese government announced price controls that month to try to halt it.

Meanwhile, the greater wealth created within the Chinese economy led to an exploding stock market. This bubble in stocks was further fueled by asset controls that prevented most Chinese investors from moving their money outside of China. The effects of this could be seen by examining prices of Chinese stocks that traded in both the mainland and Hong Kong. The prices on the mainland exchanges were much higher than those in Hong Kong. In August of 2007, the Chinese government announced a policy shift that would allow mainland investors to buy and sell stocks in Hong Kong. The effect of stock prices in Hong Kong was explosive and only days later the Chinese government announced this policy change would be on hold for the foreseeable future.

For more on this topic, please see the video: "Global Perspectives on the Decline and Fall of the U.S. Dollar" at: http://www.youtube.com/watch?v=dbHxbOvjYis&NR=1

Next: All that Glitters Isn't Gold, It's Also Silver

Daryl Montgomery
Organizer, New York Investing meetup

For more about us, please go to our web site at: http://investing.meetup.com/21.